Analysis of the US Investment Grade Corporate Bond Market during March 2020

In this episode, we sit down with Professor Valentin Haddad to unpack the intricacies of market elasticity, passive investing, and the dynamic nature of financial markets. Valentin is an Associate Professor of Finance at UCLA Anderson School of Management and a research fellow for the National Bureau of Economic Research’s Asset Pricing Program. His research focuses on how financial institutions trade, and manage risk, and their impact on market prices and the broader economy. Notably, his work challenges traditional assumptions, such as the perceived safety of life insurance companies' investments in Treasuries. In our conversation, we delve into the impact of index funds on the market, stock market bubbles around the development of new technology, and the response of investment-grade corporate bonds to the COVID-19 crisis. Discover the definition of demand elasticity, strategic interaction, and how market elasticity has changed over time. Explore how he defines a market bubble, ways stock market bubbles are related to new technology, and how to measure the value of innovation. We also discuss the impact of COVID-19 on investment-grade corporate bonds, the Federal Reserve’s response, the implications for bond safety, and much more. Tune in and join us as we uncover the mess of the market with Professor Valentin Haddad!

Key Points From This Episode:

(0:03:10) The impact of passive investing on financial markets, what investors’ demand elasticity is, and the role of index funds.

(0:06:07) Learn about strategic interactions, their influence on financial markets, and how they react to rising passive investing. 

(0:10:10) Why active investors’ options are limited in a passive investment landscape and how demand elasticities influence asset prices.

(0:13:05) How individual investor elasticities are related to aggregate market elasticity and the ways investor elasticity has changed. 

(0:20:54) Large and small stock elasticity trends, the implications of his research for asset prices, and the relationship between elasticity and information.

(0:25:32) His opinion on a bubble in large stocks forming due to flows into index funds and how market bubbles drive innovation.

(0:29:31) Potential measures to address the issues with index funds and how individual investors should be reacting to the situation. 

(0:34:46) Unpack how he defines a market bubble, measuring the value of innovation, and their effect on the value of technology. 

(0:42:29) What his research findings mean for innovation policy and what to consider before investing in innovative companies.

(0:46:33) Insights from his paper examing the impact of COVID-19 on fixed-income and the different market reactions.

(0:53:40) Explore the Fed’s intervention during the pandemic, what effect it had, and the safety that bonds offer during a crisis.

Quotes:

“You choose how you trade based on how other people are trading. So, it's not really just what you like to do, but how you react to others in the market.” — Professor Valentin Haddad (0:06:40)

“If nobody's acquiring information, then markets are very inefficient. Then, you should step in, in a way. So, if everybody is becoming passive, there are more gains for being not passive.” — Professor Valentin Haddad (0:22:59)

“Speculation often comes with innovation.” — Professor Valentin Haddad (0:28:30)

“I think these concerns with passive investing are meaningful. I don't think it's quite yet the time for a very strong regulatory call. Regulators should keep track of this evolution.” — Professor Valentin Haddad (0:31:42)

“You can gain from bubbles, but at the end, the end of the bubble comes. The long-term gains of innovation are still there, but many people who partake in the bubble are going to suffer a lot.” — Professor Valentin Haddad (0:43:57)

Links From Today’s Episode:

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/ 

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemind

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/ 

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Professor Valentin Haddad — https://sites.google.com/site/valentinhaddadresearch/

Professor Valentin Haddad on LinkedIn — https://www.linkedin.com/in/valentin-haddad-0056843/

Professor Valentin Haddad Email — valentin.haddad@anderson.ucla.edu

UCLA Anderson School of Management — https://www.anderson.ucla.edu/

National Bureau of Economic Research (NBER) — https://www.nber.org/

Episode 212: Prof. Ralph Koijen — https://rationalreminder.ca/podcast/212

Papers From Today’s Episode: 

‘How Competitive is the Stock Market? Theory, Evidence from Portfolios, and Implications for the Rise of Passive Investing’ — https://dx.doi.org/10.2139/ssrn.3821263

‘Concentrated Ownership and Equilibrium Asset Prices’ — https://www.stern.nyu.edu/sites/default/files/assets/documents/Princeton- Haddad - Concentrated ownership.pdf

‘Bubbles and the Value of Innovation’ — https://drive.google.com/file/d/1tnvZ5L_zUcehn5hR720Nl1vtsTv4VgK0/view

‘When selling becomes viral: Disruptions in debt markets in the COVID-19 crisis and the Fed’s response’ — https://doi.org/10.1093/rfs/hhaa145

‘How Speculation Affects the Market and Outcome-Based Values of Innovation’ — https://ideas.repec.org/a/fip/fedreb/94686.html